The Wall Street Journal-20080130-FBI Launches Subprime Probe- Fourteen Companies Are Investigated For Possible Fraud
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FBI Launches Subprime Probe; Fourteen Companies Are Investigated For Possible Fraud
Full Text (980 words)WASHINGTON -- The Federal Bureau of Investigation has opened criminal inquiries into 14 companies as part of an investigation of the subprime-mortgage crisis, FBI officials said. The probe is focusing on accounting fraud, securitization of loans and insider trading, among other areas.
The FBI wouldn't identify the companies under investigation but said it is looking into allegations of fraud in various stages of the mortgage process, from companies that bundled the loans into securities to the banks that ended up holding them.
As previously reported, federal prosecutors in Brooklyn, N.Y., as well as the Securities and Exchange Commission are looking into the collapse of two Bear Stearns & Co. hedge funds. The SEC and Justice Department also are investigating insider stock sales and accounting at New Century Financial Corp., a mortgage lender in bankruptcy proceedings.
Yesterday, Morgan Stanley and Goldman Sachs Group Inc. disclosed in regulatory filings that they had received requests for information from government and regulatory agencies related to subprime loans, but the companies didn't identify the agencies. The companies declined to comment further.
FBI officials say their investigations are in the early stages. They note that the probes are complicated because of the sophisticated financial vehicles used to propel the mortgage-business boom in recent years.
Sharon Ormsby, financial-crimes section chief in the FBI's criminal- investigative division, said in an interview that the bundling of both good and bad loans into single securities makes any possible fraud hard to untangle. "The bundling of these loans is so huge, it's difficult for us to tear apart each of those bundles and say, 'OK, this bad loan is causing this securitization to fail."
The bureau's probes are the latest in a long list of investigations into the collapse of the subprime-mortgage market. In addition to the Justice Department and the SEC, various state attorneys general have begun their own investigations, including New York Attorney General Andrew Cuomo, who is looking into possible wrongdoing connected to mortgage-backed securities bought and sold by Wall Street firms.
The FBI's investigations represent an added dimension to the bureau's decade-long focus on mortgage fraud, which spiked during the housing boom. For years, the FBI has targeted fraud cases involving real-estate agents, appraisers and fake buyers. More recently, FBI officials and local prosecutors have set up teams to investigate mortgage fraud in several states where they have noted high fraud activity, including California, Texas, Florida and Arizona, all of which saw fast-growing rates of home-value appreciation.
The FBI and the Department of Housing and Urban Development opened an investigation into the mortgage practices of Atlanta home builder Beazer Homes USA nearly a year ago. In October, Beazer said it expected to pay regulators $8 million to $15 million to settle losses or fines related to violations of certain lending laws.
Now, the FBI is taking a closer look at possible fraud in the secondary market for mortgages, which could implicate well-known financial firms. The faltering U.S. housing market and a rise in defaults and foreclosures, particularly among low-end borrowers, has whipsawed global stock and bond markets, led to the dismissal of Wall Street chiefs and resulted in losses by banks, hedge funds and securities firms.
One potential angle is whether real loans were used to create mortgage securities. Typically, a mortgage security might hold thousands of mortgages. Among other things, the Justice Department is likely to look at whether one mortgage was replicated across multiple securities as underwriters sought to meet high investor demand.
Neil Power, chief of the FBI's economic-crimes unit in Washington, said the bureau was going over the books of financial firms that have been forced into bankruptcy as a result of the mortgage crisis, looking for instances of insider trading or other wrongdoing.
FBI officials say the bureau is working with the SEC, which has opened more than three dozen investigations in the subprime-mortgage business, including the role of mortgage brokers, investment banks and due-diligence companies involved in the underwriting and securitization of loans.
The SEC is also reviewing the procedures of credit-ratings companies that rated mortgage-backed debt. In recent weeks, the SEC has sent subpoenas to some companies involved in the underwriting and securitization process, people familiar with the matter say.
Countrywide Financial Corp., the nation's largest home-mortgage lender in terms of loan volume, is being investigated for its accounting practices by the SEC. As for the FBI probe, Jumana Bauwens, a company spokeswoman, said, "To Countrywide's knowledge, it is not under investigation in connection with this matter."
On Jan. 17, the Florida Attorney General issued a subpoena to Countrywide. Among other things, the subpoena asks Countrywide to describe the standards it used to determine whether borrowers qualified for a prime, subprime or Alt-A mortgage and for no and low documentation loans. The subpoena -- which covers the period from Jan. 1, 2005, to the present -- also asks the company to explain how its underwriting standards may have changed over time. It also asks Countrywide for copies of "promotional advertisements, literature, booklets" and other materials aimed at subprime customers as well as for copies of any scripts or instructions given to Countrywide employees.
The attorney general is "looking for information regarding whether or not consumers have been taken advantage of and whether or not any of these business practices may potentially violate Florida law," says a spokeswoman for Florida attorney general Bill McCollum. The attorney general is conducting "a widespread review of the mortgage industry," she says.
Countrywide couldn't be immediately be reached for comment on the Florida subpoena.
In addition to the Florida investigation, Countrywide also faces investigations of its lending practices by attorneys general in California and Illinois as well as lawsuits by shareholders, borrowers and employees. Bank of America Corp. agreed earlier this month to acquire the big home-mortgage lender.
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James R. Hagerty, Kate Kelly, Michael Corkery, Carrick Mollenkamp and Ruth Simon contributed to this article.
